Key Takeaways

  • Clearly defined payment terms, including lump sum or installments, are critical in any loan agreement.
  • Include a late payment clause and consider adding an acceleration clause for non-payment.
  • Decide whether the loan is secured or unsecured and specify any collateral if applicable.
  • Written demand letters can serve as legal evidence if payment issues arise.
  • IRS payment plans offer structured installment options for tax-related debts.
  • Agreements should include essential terms like interest rate, due dates, and payment methods.
  • Online payment agreements may streamline the process for formalizing repayment.
  • Including signatures and witness details helps make the agreement enforceable.

How to Write a Legal Document for Money Owed

The first step in creating a contract for a loan is deciding on the type of payment plan that will be offered. One option is to provide an installment loan that doesn't require the payment of interest. In this situation, the person borrowing the money must pay back the amount of money loaned in equal payments over the period of time specified in the contract.

Another option for repayment is a lump-sum payment. In this situation, the borrower must pay the full amount borrowed, along with any required interest, in a single payment. After you have decided on the terms of the loan, you will need to draft a promissory note. This document should include the names of the borrower(s) and lender(s). At the start of the note, make sure to include the address of the borrower(s) and the lender(s).

Within the promissory note, you will want to outline whether the terms are negotiable. This statement should clearly state whether the borrower or lender has any flexibility with the lending or repayment of the money.

  • To make the terms negotiable, simply state that the note is negotiable.
  • For a non-negotiable promissory note, make sure the contract includes the words “this note is non-negotiable."

Next, you will need to make sure that the contract includes the provisions for payment. This section can follow the statement of negotiability and will outline what type of loan you are offering to the borrower. Examples include installment loans, lump-sum payments, and other options, with or without interest.

Essential Terms to Include in a Payment Agreement

When creating a legally enforceable agreement to pay back money owed, include the following key elements:

  • Loan Amount and Purpose: Clearly state the principal amount and what it’s for (e.g., personal loan, business expense).
  • Repayment Terms: Outline whether the loan is to be repaid in a lump sum or through installment payments. Include the due date(s).
  • Interest Rate (if applicable): If interest is charged, state the annual or monthly rate and how it accrues.
  • Payment Method: Specify whether payment will be made via check, direct deposit, or another method.
  • Default Conditions: Describe what constitutes a default and any applicable remedies or penalties.
  • Signatures and Date: Both the borrower and lender should sign the document. Including the date of the agreement and having it witnessed or notarized can further strengthen enforceability.

Late Payment Clause

From there, you may want to include a clause that talks about any penalties that come with paying later than what the terms outline. Not all types of loans require a late payment clause. However, if you want to protect yourself by ensuring that you will receive compensation if the borrower repays the loan later than what was agreed upon, you may wish to include this clause.

If the loan will have an interest-only or installment payment option, you may want to include a statement that outlines the provision for a late payment. For example, you could include something like, "If any interest-only or installment payment as outlined under this note is not received by the lender within [number of days of grace period], the borrower is responsible for paying a [percentage] late fee, which will be multiplied by the monthly payment amount. The borrower must pay the late fee immediately."

You may choose to include an acceleration clause as part of the late payment provision, as well. An acceleration clause allows you to demand that the borrower must pay the amount in full immediately upon paying late. An example of language for an acceleration clause is, “If any interest-only or installment payment is not received within [number of days of acceleration grace period] after the due day date, the lender may demand that the entire amount of the principal that has not yet been paid be given to the lender immediately."

After any late payment clauses, the contract should include the addresses where payments and notices will be sent. The payment address would be the address of the lender, while the notice address would be the address of the borrower.

IRS Installment Agreement Considerations

For individuals or businesses repaying debt to the IRS, formal IRS installment agreements can serve as a structured form of an "agreement to pay back money owed." These agreements:

  • Allow taxpayers to pay over time if they cannot pay their balance in full.
  • Can be short-term (120 days or less) or long-term (more than 120 days).
  • Require consistent monthly payments, usually set up via direct debit or payroll deduction.

The IRS also provides an Online Payment Agreement Application where individuals can apply for installment plans digitally. This option is particularly beneficial for taxpayers who want a legally binding structure without negotiating a private loan agreement​.

When drafting a private loan contract, it may be helpful to mirror IRS guidelines for clarity and fairness—such as regular payment schedules, late fee structures, and secure electronic payment options.

Secured vs. Unsecured

You will need to determine whether the loan amount is unsecured or secured. Unsecured means that the support for the loan amount comes from the credit of the borrower, not by any required collateral. A secured loan has some type of collateral attached. If the borrower in a secured loan defaults on the payments, the lender can retain possession of the collateral as a way to be repaid.

Additional Protections and Dispute Clauses

To strengthen your agreement to pay back money owed, consider including clauses that preemptively address potential disputes:

  • Governing Law: State which state’s laws apply to the agreement.
  • Dispute Resolution: Outline whether disputes will be resolved through arbitration, mediation, or court action.
  • Modifications: Include a clause that specifies that any changes must be made in writing and signed by both parties.
  • Waiver of Rights: If any rights (e.g., jury trial) are waived, they must be expressly stated.

These elements help protect both lender and borrower, reduce ambiguity, and add legal enforceability.

How to Demand Payment in a Letter

If you need to demand payment on a loan, you will need to write out the demand in a letter. Start by outlining the reasons and what happened in the situation. The other party may be aware of what has happened with the loan, but it's always helpful to have a written description with plenty of detail. If you have to take the other party to court, the letter can serve as evidence. The judge wouldn't be aware of the circumstances around the loan.

Signing, Witnessing, and Notarization

While a signed document may already be enforceable, adding extra validation increases legal strength:

  • Witness Signatures: Having at least one impartial witness sign the agreement can bolster its credibility in court.
  • Notarization: A notary public can confirm the identity of signatories and date of the agreement, adding a layer of verification.
  • Digital Signatures: If signing remotely, ensure the use of a secure and legally recognized e-signature platform.

These steps offer legal backup if you need to enforce the agreement to pay back money owed through formal channels.

Frequently Asked Questions

  1. Does an agreement to pay back money owed need to be notarized?
    Not necessarily, but notarization can help prove authenticity if a legal dispute arises.
  2. What happens if the borrower doesn’t follow the payment schedule?
    The lender can take legal action for breach of contract, especially if default and remedy terms are outlined.
  3. Can I create a repayment agreement without a lawyer?
    Yes, but it’s wise to consult an attorney for complex loans or large sums. You can find one on UpCounsel for assistance.
  4. Is interest required in a repayment agreement?
    No, interest is optional. However, if included, the rate and how it’s calculated must be clearly stated.
  5. Are IRS payment agreements different from personal loan agreements?
    Yes. IRS agreements are specifically for tax debt and follow federal guidelines, while personal loan agreements are private contracts between parties.

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